The document discusses bundling, which is selling multiple products together as a single package. It uses the example of cable television bundles, which many consumers dislike and prefer to purchase channels individually. However, the document argues that bundling can benefit both sellers and consumers when done correctly. It provides an example showing that bundling two channels can maximize total revenue for the seller while still providing modest savings and consumer surplus for buyers. When the bundled price is below the summed reservation prices of consumers, bundling leaves all parties better off.
9. BUT FIRST, SOME DEFINITIONS
1 Reservation Price
The highest price a buyer is willing to
pay for an item.
Optimal Price
The price that maximizes the sellers
revenue.
Consumer Surplus
The reservation price minus the optimal
price.
2
3
10. Optimal prices are almost
always a little lower than
reservation prices.
Were going to assume 10% lower in this case.